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The SEC approved on February 6, 2006, the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard no. 4 ( www.sec.gov/news/digest/dig020706.txt ; www.pcaobus.org/news_and_events/ ). This standard provides guidance for a standalone engagement that is voluntary and performed only at the request of management. It provides direction and establishes requirements that apply when an auditor is engaged to report on whether a previously reported material weakness in a company’s internal control over financial reporting continues to exist as of a date specified by its management. To facilitate the implementation of the standard, the SEC is allowing the PCAOB 90 days from the date of the commission’s order to issue a clear and concise outline of the affirmative audit steps set forth in the standard.
The Federal Financial Institutions Examination Council (FFIEC), on behalf of the Federal Reserve System, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, issued a final advisory that instructs financial institutions not to enter into agreements such as external audit engagement letters that contain “unsafe and unsound” limitation of liability provisions regarding audits of financial statements and internal control over financial reporting ( www.ots.treas.gov/docs/4/480217.pdf ). The advisory includes examples of such inappropriate provisions and is effective for engagement letters executed on or after February 9, 2006. While the guidance does not apply to previously executed engagement letters, the FFIEC encourages financial institutions subject to multiyear audit engagement letters to amend them to be consistent with the advisory for periods ending in 2007 or later. The advisory reflects earlier comments from the AICPA in support of engagement letters that limit an auditor’s liability to the client for punitive damages, provided it remains liable for actual damages.